Alternative Investment Funds: An Insight

An alternative investment is a fund established or incorporated in India which is a privately pooled investment vehicle, which collects funds from sophisticated investors, whether in India or abroad for investing in accordance with a defined investment policy for the benefit of investors. As an alternative to the conventional categories of financial assets that include Therefore it is a financial asset that does not fall into one of the conventional investment categories that include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, derivatives etc. Investing in AIF may provide huge returns, however the same is coupled with high risks and complex nature. Hence the major investors for AIF are institutional investors and HNIs.

Emergence of AIFs in India

In India alternative investment funds (AIFs) are regulated by the Securities Exchange Board of India and are provided for in Regulation 2 (1) (b) Sebi (Alternative Investment Funds) Regulation, 2012. AIFs have been described as a privately held and managed pool of investment fund of either domestic or foreign origin AIFs that are organized in the form of an LLP (limited liability partnership), corporate body, company or trust.

As of March 2018 over 400 AIFs are already registered with the Sebi, with commitments raised of ₹1.65 lakh crore. 

Types of AIFs

AIFs primarily seek and pitch in investments under three broad categories. All these categories are granted registration with the board on the same platform. The various categories under which registration can be granted are as follows:

Registration of AIFs

To establish itself as an AIF, no entity or person shall act without obtaining a certificate of registration from the Sebi. Application to the board shall be made in Form-A in sub-regulation (4) as specified in the fifth schedule of the AIF Regulations for the registration as either category I or category II or category III AIF. 

The AIF that has been granted in principle approval may accept commitments from investors but shall not accept monies till it is granted registrations.

Eligibility Criteria 

a)    A Company/Trust/LLP- which is permitted by its charter document to carry on the business of AIF and has a specific prohibition for inviting public to subscribe to its securities.

b)    Key Investment Team: The key investment team of the manager to AIF has an adequate experience with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or assets or wealth or portfolio management or in the business of buying selling and dealing with the securities or other financial assets and has relevant professional qualification.

c)    Infrastructure: The manger and the sponsor shall have adequate infrastructure and manpower.

d)    Investment Strategy: The applicant should have a clearly defined investment objective, the target investors, proposed corpus, investment style or strategy and the proposed tenure of scheme at the time of registration.

e)    No Refusal initially: The applicant or the entity established by the Sponsor or the Manager should not have been refused registration by the Board.

Management and Operations of AIFs

There are 3 key stakeholders to an AIF

• Sponsors are individuals who set up the AIF and includes the promotor in case of company and designated partner in case of LLP.
• Trustees, who are independent professionals who overlook the activities of the fund.
• Investment Manager, holds relevant expertise to actively manage the fund in consideration of management fee which can be linked to performance of the fund.

Who can invest in AIFs?

Investment in all categories of AIF shall be subject to the following conditions;

a)    AIF may raise funds from any investor whether Indian or foreign or non resident Indian by way of issue of its units;

b)    Each scheme of the AIF shall have corpus of at least Rs. 20 crore;

c)     An AIF shall not accept from an investor an investment value of less than Rs. 1 crore.

d)    The manager or the Sponsor shall have a continuing interest AIF of not less than 2.5% or Rs. 5 crore, whichever is lower in the form of investment in AIF and such interest shall not be through the waiver of management fees.

e)    The manager or the sponsor shall disclose their investment in the AIF to the investors;

f)      No scheme of AIF shall have more than one thousand investors;

g)    The fund shall not solicit or collect funds except by way of private placement;

Tenure 

a)    Category I and Category II shall be close ended and the tenure of the fund or the scheme shall be determined at the time of application;

b)    Category I and Category II AIF or schemes launched by the funds shall have a minimum tenure of three years;

c)     Category III AIF may be both open and close ended;

Listing

a)    The units of close ended AIFs may be listed on the stock exchange subject to the minimum tradable lots of Rupees One Crore;

b)    Listing of the Alternative Investment Fund units shall be permitted only after the close of the fund or the scheme;

General Investment Conditions

Investment in AIF shall be subject to the following conditions:

a)    AIF may invest in securities of companies incorporated outside India subject to the applicable laws;

b)    Co investment in Investee company by the Manager or the Sponsor shall not be on the terms more favorable than those offered to AIFs;

c)     AIFs shall not invest in associates except with the approval of seventy five percent of investors by value of their investment in AIF;

d)    Uninvested portion of the investable funds may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, CBLOs, Commercial Papers, Certificate of Deposits etc. till the deployment of funds as per the investment objective;

e)    Category I and Category II AIF shall invest not more than 25% of the investable funds in one Investee Company;

f)      Category III AIF shall invest not more than 10% of the investable funds in one Investee Company;

With Indian AIFs making rapid strides in attracting investors, the next policy imperative would be to expand the domestic pool of AIF assets and to onshore assets that are currently managed from offshore destinations like Singapore, Mauritius and Thailand, so that the spin off benefits from the AIF revolution can flow to the Indian economy. 

The author is Managing Partner, Sameer Mittal & Associates LLP